Are debt collectors all wrong for the job of pursuing unpaid student loans?
The U.S. Education Department uses 22 collection agencies to pursue $89 billion in overdue student loans, paying them $1 billion in commissions in 2014, according to a report by the National Consumer Law Center, “Pounding Student Loan Borrowers: The Heavy Costs of the Government’s Partnership with Debt Collection Agencies.” The tab is set to rise to $2 billion in 2016.
The department does little about the complaints that collectors generate, the study found. The department tracks complaints poorly, and hands out bonus payments without regard to companies’ complaint records. Weak oversight of collectors was previously documented by the Government Accountability Office in a March report.
More troubling, commission-driven collectors have little incentive to steer borrowers toward affordable repayment programs that allow them to complete their degrees, according to the consumer advocate group.
“Student loans are fundamentally different from regular loans,” said Persis Yu, a staff attorney with the NCLC and co-author of the report. “If (students) are allowed to get that degree, they’re in a better position to pay their loans.”
ACA International, the trade group for collectors, said the report failed to show that professional collectors are wrong for the task of collecting student loans. “There’s a bit of wrong emphasis here,” ACA General Counsel Robert Foehl said. Collectors follow the Education Department’s requirements “because they want to keep their business with that client.” In addition, he said, the NCLC cites high volumes of complaints against collectors without noting that complaints are not necessarily legitimate.
Government support of education is supposed to help the economy, as well as give individual students a leg up on a better life. The Higher Education Act provides for “rehabilitation” of loans for students who fall behind on payments. By making a series of payments based on their income, they can get out of default and qualify for further grants and loans to finish their education.
But when student loans hit trouble, for-profit collectors are motivated to go after higher upfront payments immediately, rather than help student debtors get back on their feet, the NCLC found. The report cited complaints from students who were given wrong information about qualifying for rehabilitation.
“A lot of borrowers are in a Catch-22,” Yu said. “They don’t finish their degree, so they can’t get the grants and loans to finish their education.”
Based on complaints made directly to the NCLC and posted on online discussion groups, borrowers are frequently told to make payments based on a percentage of the loan amount, not their income and ability to pay, the group said. Collectors of student loans have the ability to seize some income and assets from borrowers without a court order, making their repayment demands especially persuasive. The problem diminished after 2012, when the Education Department increased its payments to collectors for setting up income-based repayment plans, but collector incentives are still weighted toward demanding higher payments.
The solution is to have government workers perform student loan collections, NCLC says, which is the way overdue taxes are collected now by the Internal Revenue Service. “We do fundamentally have a question,” Yu said, “if the debt collection model is appropriate for resolving defaulted student loan borrowers’ debts.”